Questions and Answers of Corporate Financial Management

=+18(Examination level) Describe the cash conversion cycle and suggest ways of making it smaller.
=+19 How can we go bankrupt if we have a full order book and sales rising by 100 per cent per year. Don't be ridiculous.' Explain to this incredulous managing director the problem of overtrading and
=+20 Explain the tension managers have to cope with when judging the correct level of working capital. Also describe the alternative approaches to funding business growth.
=+21 What are the costs of holding too little or too much cash? Describe what is meant by a policy framework for cash management, planning of cash flow and control of cash flow.
=+Companies go bankrupt if they get working capital management badly wrong.
=+Describe two ways in which this might happen.
=+23* Rubel ple has the following figures:Year end, or during year£000s 20X1 20X2 Finished goods inventory 50 55 Work-in-progress inventory 40 35 Raw material inventory 100 110 Debtors 300 2.50
=+Calculate the cash-conversion cycle during 20X2.
=+24 Texas ple, a large manufacturer of windscreen wipers, holds 100 days' stock. This contrasts with the 50 days' stock held by its main competitor. Describe what might
=+explain this difference and suggest solutions to any problem areas.
=+25* (Examination level) Sheetly ple has an overdraft of £500,000 which the directors are alarmed about. Their concern is further aroused by the fact that in July a tax demand for £200,000 will be
=+vehicles at a cost of £150,000 in August. The present time is the beginning of May and the figures in the table are projected for the next six months.For each month's sales 30 per cent of the cash
=+Suppliers of materials grant one month's credit and at the beginning of May these suppliers were owed £820,000. All other costs are paid for as incurred.Required aDraw up a cash flow forecast for
=+b Suggest ways in which working capital management policy could be altered to reduce the cash flow strain over the forthcoming months.Consider the following alternatives to the overdraft and
=+1 Select an item of stock held by a firm familiar to you and estimate the total cost of holding one unit of that type of inventory for one year. Also obtain some estimate of the cost of placing and
=+2 Consider the working capital cycle of a firm you know well. Try to estimate the length of time money is tied up in each stage. Suggest ways of improving the efficiency of working capital
=+3 If your firm does not yet have a designated treasurer write a report pointing out the value of such a role and recommend whether such an appointment should be made or other, less specialised
=+4 Examine the annual reports of six large quoted UK firms and note the role of the treas-ury by reading the text and between the lines.
=+discuss the meaning of the random walk hypothesis and provide a balanced judgement of the usefulness of past price movements to predict future share prices (weak-form efficiency);
=+provide an overview of the evidence for the stock market's ability to take
=+account of all publicly available information including past price movements (semi-strong efficiency);
=+state whether stock markets appear to absorb all relevant (public or private) information (strong-form efficiency);
=+outline some of the behavioural-based arguments leading to a belief in inefficiencies;
=+comment on the implications of the evidence for efficiency for investors and corporate management.
=+1 Explain the three forms of market efficiency.
=+2 Does the EMH imply perfect forecasting ability?
=+3 What does "random walk' mean?
=+4 Reshape ple has just announced an increase in profit of 50 per cent. The market was expecting profits to double. What will happen to Reshape's share price?
=+5 Can the market be said to be inefficient because some shares give higher returns than others?
=+6 What use is inside information in the trading of shares?
=+7 Why is it important for directors and other managers to communicate to shareholders and potential shareholders as much information as possible about the firm?
=+8 What are the implications of the EMH for investors?
=+9 What are the implications of the EMH for managers?
=+10 What are allocative, operational and pricing efficiency?
=+11 What are 'technical analysis' and 'fundamental analysis"?
=+1 Manchester United ple, the quoted football and leisure group, wins the cup and there-fore can anticipate greater revenues and profits. Before the win in the final the share price was 640p.
=+a What will happen to the share price following the final whistle of the winning game?
=+b Which of the following suggests the market is efficient? (Assume that the market as a whole does not move and that the only news is the football match win.)
=+i The share price rises slowly over a period of two weeks to reach 700p.
=+ii The share price jumps to 750p on the day of the win and then falls back to 700p one week later.
=+iii The share price moves immediately to 700p and does not move further relative to the market.
=+2 If Marks and Spencer has a 1 for 1 scrip issue when its share price is 550p what would you expect to happen to its share price in theory (no other influences) and in practice?
=+3 (Examination level) "The paradox of the efficient market hypothesis is that large numbers of investors have to disbelieve the hypothesis in order to maintain efficiency.'Write an essay explaining
=+4(Examination level) "Of course the market is not efficient. I know lots of people from technical analysts to professional fundamental analysts who have made packets of money on the market.'
=+(Examination level) It could be said that insufficient attention has been paid to psy-chological factors when explaining stock efficiency anomalies. Outline the efficient stock market hypothesis
=+6(Examination level) The efficient market hypothesis, if true, encourages managers to act in shareholder wealth enhancing ways. Discuss this.
=+7 If the efficient market hypothesis is true an investor might as well select shares by sticking a pin into the Financial Times. Explain why this is not quite true.
=+8 Arcadura ple has been planning a major rights issue to raise £300m. The market has fallen by 10 per cent in the past four days and the merchant bank adviser suggests that Arcadura wait another
=+9 Chartism and fundamental analysis are traditional methods used by stock market investors to make buy or sell decisions. Explain why modern finance theory has con-tributed to the growing
=+10 (Examination level) 'The world's well developed stock markets are efficient at pricing shares for most of the people most of the time.' Comment on this statement.
=+explain what is meant by stock market efficiency.
=+11 (Examination level) The following statements are extracts from the detailed minutes taken at a Board meeting of Advance plc. This company is discussing the possibility of a new flotation on the
=+Mr Adams (Production Director): "I have been following the stock market for many years as a private investor. I put great value on patterns of past share prices for pre-dicting future movements. At
=+put all my money into tracker funds and forget analysis. Delaying our flotation is pointless, the market might just as easily go down.'Required Consider the efficient stock markets theory and
=+12 A number of companies were put off flotation on the London Stock Exchange in 2002 because the market was too low.' Explain the efficient market hypothesis and assess the logic of such
=+13 The chief geneticist at Adams Horticultural ple has discovered a method for raising the yield of commercial crops by 20 per cent. The managing director will make an announcement to the Stock
=+14 Rapid Growth ple has recently changed the methods of accounting for depreciation, stock and research and development, all of which have the effect of improving the reported profit figures.
=+15 A famous and well-respected economist announces in a Sunday newspaper that the growth phase of the economy is over and a recessionary trend has begun. He bases his evidence on the results of a
=+Explain the logic behind your answer with reference to the efficient market hypothesis.
=+16 Explain why professional and highly paid fund managers generally produce returns less than those available on a broadly based market index.
=+17(Examination level) Describe the extent to which the evidence supports the efficient market hypothesis.
=+Consider the actions of the directors of a stock-market quoted company you know well. Do they behave in such a way as to convince you they believe in the efficiency of the stock market?
=+ In what ways could they take steps to ensure greater efficiency of stock market pricing of the company's shares?
=+explain the failure of accounts-based management (e.g. profits, balance sheet assets, earnings per share and accounting rate of returns) to guide value-maximising decisions in many circumstances;
=+describe the four key drivers of value and the five actions to increasing value.
=+5 What are the fundamental considerations to which you would advise a firm to give thought if it were contemplating borrowing from a bank?
=+d Zero coupon bond.e Floating-rate note.
=+b Trustee.Debenture.
=+2 Explain the following (related to bonds):Par value.
=+7 In what ways does the tax regime encourage debt finance rather than equity finance?
=+9 What is meant by asymmetric information in the relationship between banker and borrower?
=+10 What is a syndicated loan and why do banks join so many syndicates?
=+11 What are the differences between a domestic bond, a Eurobond and a foreign bond?
=+12 What is the credit rating on a bond and what factors determine it?
=+13 Why do bond issuers accept restrictive covenants?
=+14 What are high-yield bonds? What is their role in financing firms?
=+15 What is a bearer bond?
=+16 What is a debenture?
=+1 What are the relative advantages and drawbacks of debt and equity finance?
=+explain the term structure of interest rates and the reasons for its existence.
=+9 Venture capital funds made an internal rate of return of 13.6 per cent on investments up to the end of 2003. Describe the role of venture capitalists in the UK economy and comment on the rates of
=+10 Examine the articles in Appendix 10.1 and write an essay advocating the case for avoiding flotation on a recognised investment exchange.
=+11 Write an essay advocating the case for flotation on a recognised investment exchange.
=+12 The shareholders of Yellowhammer ple are to offer a one-for-four rights issue at£1.50 when its shares are trading at £1.90. What is the theoretical ex-rights price and the value of a right per
=+13 Explain the function of a prospectus in a new share issue.
=+15 Discuss the main features of venture capital and explain the dangers to an unwary management.
=+16 Explain placings and offers for sale for new issues and comment on the reasons for the increased use of placings.
=+17 If business angels are not connected with divine intervention in business matters, seedcorn capital is not something to do with growing food and a captured fund is not theft, what are they and
=+19 (Examination level) Imagine that AM Paper (see Exhibit 10.44) have appointed you as adviser to the Board of directors. The directors have asked you to explain the rela-tive merits and
=+Consider the equity base of your company, or one you are familiar with. Write a report outlining the options available should the firm need to raise further equity funds. Also consider if
=+explain the nature and the main types of bonds, their pricing and their valuation;
=+describe the main considerations for a firm when borrowing from banks;give a considered view of the role of mezzanine and high-yield bond financing as well as convertible bonds, sale and leaseback,
=+demonstrate an understanding of the value of the international debt markets;
=+f Advise Mahogany on the virtues of a deep-discounted rights issue.
=+17 What is the difference between a fixed-rate and a floating-rate bond?
=+A two-year bond with an annual coupon of 6 per cent, par value of £100 and the next coupon payment in one year. The current yield to maturity on this bond is 6.5 per cent.
=+A ten-year bond with an annual coupon of 6 per cent, a par value of £100 and the next coupon payable in one year. The current yield to maturity on this bond is 7.2 per cent.
=+ili A 20-year bond with an annual coupon of 6 per cent, a par value of £100 and the next coupon due in one year. The current yield to maturity on this bond is 7.7 per cent.
=+a Draw an approximate yield curve.
=+b Calculate the market price of each of the bonds.

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